Safeway may be target of buyout bid

PLEASANTON — Just weeks after Safeway deflected a takeover from one investor, the national grocery chain is being pursued by a group of investment firms that want to buy all or part of the company, according to media reports.

Reuters reported late Tuesday that New York-based Cerberus Capital Management is leading a group of private equity firms in a plan to take over Safeway, which operates more than 1,400 stores across the country. The news service also said that Safeway officials were in talks with financial adviser Goldman Sachs.

The reported buyout plan could not be confirmed Wednesday. Goldman Sachs could not be reached for comment and a spokesman from Cerberus Capital declined to comment.

Safeway spokeswomen Teena Massingill said the Pleasanton-based company “would not comment on rumors.”

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“If we have an announcement about our operations, everyone will know at the same time, just like with every other operation,” she said.

But analysts said a buyout makes sense. “We would not dismiss the media reports given potential upside from … synergies” between Safeway and Cerberus, Karen Short, an analyst with Deutsche Bank, wrote in a research note.

Safeway stock is widely considered undervalued by investors, and the company is flush with proceeds from the sale of its Canadian operations in a $5.6 billion deal with that country’s second-largest grocery chain, Empire, and anticipating a large chunk of cash after it sells its Midwest stores.

“Stock is not as cheap as it’s perceived to be,” Ajay Jain, analyst with Cantor Fitzgerald Equity Research, wrote in a research note earlier this month.

Safeway shares closed at $35.58 Wednesday. But Short, of Deutsche Bank, said a buyout offer of $56 a share “would be very reasonable.”

Scott Mushkin of Wolfe Research agreed that Cerberus would “pay a lot more than the current price” of shares.

Combining Safeway and Cerberus would allow the grocer to become “the dominant western grocer,” he said. Mushkin added that Cerberus’ strong share of the market on the East Coast would enable the grocery to improve sales in Washington, D.C., Baltimore, Philadelphia and New England, where store profits have traditionally lagged those on the West Coast.

This month Safeway announced it would exit the unprofitable Chicago market, where it operates 72 Dominick’s grocery stores, by the end of the year. Investors cheered the move, saying it would eliminate a noticeable drag on the company’s quarterly profits.

Safeway estimates gaining a tax benefit of $400 million to $450 million from the sale of Dominick’s.

Cerberus’ buyout could be the second attempt at a Safeway takeover in a month. The grocer, which also operates Vons stores in California, deflected a hostile takeover by Jana Partners last month by adopting a “poison pill” plan after learning that an investor had amassed a significant portion — 6.2 percent — of its stock. So-called “poison pill” plans let existing shareholders acquire more stock at a discounted rate to discourage a takeover.

Jana is one of the top 10 investors in the company, with about 4.7 percent of shares, according to Thompson Reuters. Goldman Sachs, the firm reportedly advising Safeway on the buyout, holds more than 2 percent of Safeway shares.

On a call with media and investors last month, Safeway executives announced a plan to buy back more company stock using some of the proceeds of the Canada sale. The company increased the amount of its stock repurchase program by $2 billion from $800 million.